CPHI China Pharma Holdings Inc

NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations – China Pharma Holdings, Inc., a Nevada corporation (“China Pharma”), owns 100% of Onny Investment Limited (“Onny”), a British Virgin Islands corporation, which owns 100% of Hainan Helpson Medical & Biotechnology Co., Ltd (“Helpson”), a company organized under the laws of the People’s Republic of China (the “PRC”). China Pharma Holdings, Inc. and its subsidiaries are referred to herein as the Company.

Onny acquired 100% of the ownership in Helpson on May 25, 2005, by entering into an Equity Transfer Agreement with Helpson’s three former shareholders. The transaction was approved by the Commercial Bureau of Hainan Province on June 12, 2005 and Helpson received the Certificate of Approval for Establishment of Enterprises with Foreign Investment in the PRC on the same day. Helpson received its business license evidencing its Wholly Foreign Owned Enterprise (“WFOE”) status on June 21, 2005.

Helpson is principally engaged in the development, manufacture and marketing of pharmaceutical products for human use in connection with a variety of high-incidence and high-mortality diseases and medical conditions prevalent in the PRC. All of its operations are conducted in the PRC, where its manufacturing facilities are located. Helpson manufactures pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules, and cephalosporin oral solutions. The majority of its pharmaceutical products are sold on a prescription basis and all have been approved for at least one or more therapeutic indications by the National Medical Products Administration (the “NMPA”, formerly China Food and Drug Administration, or CFDA) based upon demonstrated safety and efficacy.

NOTE 2 – INVENTORY

Inventory consisted of the following:

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:

Depreciation relating to office equipment was included in general and administrative expenses, while all other depreciation was included in cost of revenue. Depreciation expense was $630,579 and $655,386 for the three months ended September 30, 2023 and 2022, respectively and $1,896,279 and $2,033,194 for the nine months ended September 30, 2023 and 2022, respectively.

NOTE 4 – INTANGIBLE ASSETS

Intangible assets represent the cost of medical formulas approved for production by the NMPA and the intellectual property acquired in November 2022 from Chengdu Bonier Medical Technology Development Co., Ltd (“Bonier”). On November 28, 2022, Helpson entered into a Technology Transfer Contract (the “Bonier Agreement”) with Bonier regarding a technical invention and creation of an ophthalmic oxygen enriched atomization therapeutic instrument, pursuant to which Helpson has been granted a utility model patent (the “Utility Model Patent”) and applied for an invention patent (the “Invention Patent”). No costs were reclassified from advances to intangible assets during the nine months ended September 30, 2023 and 2022, respectively. On August 9, 2023, the Company obtained the “Drug Supplementary Application Approval Notice” from the NMPA for the indicating that the Company’s Candesartan tablets have passed the quality and efficacy consistency evaluation of generic drugs.

Approved medical formulas are amortized from the date NMPA approval is obtained over their individually identifiable estimated useful life, which range from ten to thirteen years.  It is at least reasonably possible that a change in the estimated useful lives of the medical formulas could occur in the near term due to changes in the demand for the drugs and medicines produced from these medical formulas. Amortization expense relating to intangible assets was $52,514 and $8,951 for the three months ended September 30, 2023 and 2022, respectively and $161,538 and $27,914 for the nine months ended September 30, 2023 and 2022, respectively which was included in the general and administrative expenses. Medical formulas typically do not have a residual value at the end of their amortization period.

NOTE 5 – OTHER PAYABLES

Other Payables consisted of the following:

NOTE 6 – RELATED PARTY TRANSACTIONS

A member of the Company’s board of directors (“Board”) had previously advanced to the Company an aggregate amount of $0 and $1,354,567 as of September 30, 2023 and December 31, 2022, respectively, which is recorded as “Borrowings from related parties” on the accompanying unaudited interim condensed consolidated balance sheets. The advances bear interest at a rate of 1.0% per year.  Total interest expense for each of the three months ended September 30, 2023 and 2022 was $0 and $3,387, respectively and $6,773 and $10,159 for the nine months ended September 30, 2023 and 2022, respectively. Compensation and interest payable to the board member is included in Other payables in the accompanying unaudited interim condensed consolidated balance sheet totaling $8,000 and $372,578 as of September 30, 2023 and December 31, 2022, respectively. On August 23, 2023, the director entered into a certain debt transfer agreement with Chairperson Li, pursuant to which the rights to collect the $1,354,567 loan payment and $499,975 of related interest and compensation was assigned to Chairperson Li. On September 28, 2023, Chairperson Li entered into a certain loan settlement agreement, pursuant to which both parties agreed to convert the aggregate amount of $1,854,452 owed by the Company into 13,757,063 shares of restricted common stock of the Company. Such issuance was completed on September 29, 2023.

The Company had previously received advances from Chairperson Li. Total amounts owed were $1,109,453 and $1,121,273 and are recorded as “Borrowings from related parties” on the accompanying condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022, respectively. On July 8, 2019 the Company entered into a loan agreement in exchange for cash of RMB 4,770,000 ($738,379) with Chairperson Li. The loan bears interest at a rate of 4.35% and was payable within one year of the loan agreement. The due date of the loan agreement has been extended annually on identical terms, and is due July 9, 2024. Total interest expense related to the loan for the three months ended September 30, 2023 and 2022 was $6,942 and $7,731, respectively and $20,827 and $22,114 for the nine months ended September 30, 2023 and 2022, respectively. Compensation payable to Chairperson Li is included in “Other payables” in the accompanying condensed consolidated balance sheet totaling $963,506 and $951,506 as of September 30, 2023 and December 31, 2022, respectively.

NOTE 7 – LINES OF CREDIT

On June 25, 2021 the Company entered into a new loan with Bank of Communications bearing an interest rate of 4.17%. The Company paid all principal and interest on June 21, 2022 and on June 22, 2022 entered into a loan for the same principal amount bearing interest at 4.17% and due December 21, 2022. On December 21, 2022 the Company repaid the loan in full and entered into a new line of credit for an aggregate amount of RMB 7,300,000 (approximately $1.0 million) with interest payable monthly at a rate of 3.9%. The line of credit is payable on December 20, 2023. The Company received an advance on the line of credit in the amount of RMB 3,800,000 (approximately $0.56 million) on December 30, 2022. On February 24, 2023 the Company received an advance on the line in the amount of RMB 3,500,000 (approximately $0.51 million). The Company has no further availability on this line of credit. In addition, the Company’s Chief Executive Officer and Chair of the Board personally guaranteed the new line of credit and pledged personal assets as collateral for the loan. Total interest expense under this facility for the three months ended September 30, 2023 and 2022 was $10,164 and $12,759, respectively and $26,848 and $40,684 for the nine months ended September 30, 2023 and 2022, respectively.

In September 2021, the Company entered into a line of credit with China CITIC Bank in the amount of RMB 3,200,000 (approximately $0.8 million). The loan bears interest at the rate of 4.50% per annum. The line of credit was paid in full on September 6, 2022. On September 9, 2022, the Company received a new line of credit in the same amount. The loan bears interest at a rate of 4.5% and is due on September 7, 2023. In addition, Chairperson Li personally guaranteed the new line of credit and pledged personal assets as collateral for the loan. Total interest for the three months ended September 30, 2023 and 2022 was $4,243 and $5,178, respectively and $14,750 and $16,407 for the nine months ended September 30, 2023 and 2022, respectively. On September 7, 2023 the loan was repaid in full.

On September 18, 2021 the Company obtained a line of credit for RMB 10,000,000 (approximately $1.4 million) with Bank of China. The loan bears interest at the rate of 3.85% per annum. The line of credit was paid in full on the due date of September 18, 2022. On September 30, 2022 the Company received a new line of credit in the same amount. The loan bears interest at the rate of 3.45% and is due September 28, 2023. The loan is collateralized by the Company’s new production facility and the included production line equipment and machinery. In addition, Chairperson Li personally guaranteed the new line of credit. Total interest for the three months ended September 30, 2023 and 2022 was $12,398 and $13,400, respectively and $37,569 and $30,021 for the nine months ended September 30, 2023 and 2022, respectively. On September 22, 2023 the Company repaid this note in full. On September 25, 2023 the Company entered into a three year revolving loan and received proceeds of RMB 10,000,000 (approximately $1.4 million). The interest rate for the loan is 3.35% for the first twelve months of the loan and adjusts based on the latest one-year loan market quotation rate less 10 basis points as published by the China National Interbank Funding Center on the working day prior to each twelve month anniversary of the loan. The loan is due on September 24, 2026.

Principal payments required for the remaining terms of the loan facility and lines of credit as of September 30, 2023 are as follows:

Fair Value of Lines of Credit – Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, the carrying amounts of the lines of credit outstanding as of September 30, 2023 and December 31, 2022 approximated their fair values because the underlying instruments bear an interest rate that approximates current market rates.

NOTE 8 – CONVERTIBLE NOTE PAYABLE

On November 17, 2021, China Pharma entered into a Securities Purchase Agreement (the “Agreement”) pursuant to which the Company issued an unsecured convertible promissory note (the “Note”) to an institutional accredited investor Streeterville Capital, LLC (the “Investor”). The transaction contemplated under the Agreement was closed on November 19, 2021. The Note matured on February 17, 2023. On April 13, 2023 China Pharma entered into an Amendment (the “Amendment”) with the Investor which extended the maturity date of the Convertible Note Payable to May 19, 2024. As consideration for the extension, China Pharma agreed to an extension fee of $65,639, representing 2.0% of the balance of the Note and accrued interest on the date of the Amendment. The amount was satisfied by increasing the Note balance by the amount of the extension fee. The Company recorded this as additional interest expense during the second quarter of 2023. In addition, China Pharma decreased the price at which the Investor can convert the balance from 85% to 82% of the lowest daily volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion, and assumed an additional obligation to redeem a portion of the outstanding balance of the Note monthly or be subject to additional penalty fees.

The Note was originally convertible into 350,000 shares of China Pharma’s common stock at a price of $15.00 per share through April 19, 2022. Thereafter, the Note was convertible into 175,000 shares at a price of $30.00 per share. As of September 30, 2023 the Note is convertible into 58,000 shares of common stock.

Interest accrues on the outstanding balance of the Note at 5% per annum compounded daily. Upon the occurrence of an Event of Default as defined in the Note, interest accrues at the lesser of 22% per annum or the maximum rate permitted by applicable law. In addition, upon any Event of Default, the Investor may accelerate the outstanding balance payable under the Note, which will increase automatically upon such acceleration by 15% or 5%, depending on the nature of the Event of Default.

Pursuant to the terms of the Agreement and the Note, the Company must obtain Investor’s consent for certain fundamental transactions such as consolidation, merger with or into another entity (excerpt for a reincorporation merger), disposition of substantial assets, change of control, reorganization or recapitalization. Any occurrence of a fundamental transaction without Investor’s prior written consent will be deemed an Event of Default.

Investor may redeem all or any part the outstanding balance of the Note, subject to $500,000 per calendar month, at any time after one hundred twenty-one (121) days from the Purchase Price Date, as defined in the Note, upon three trading days’ notice, in cash or converting into shares of China Pharma’s common stock, at a price equal to 82% multiplied by the lowest daily volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion, subject to certain adjustments and ownership limitations specified in the Note. The Note provides for liquidated damages upon failure to comply with any of the terms or provisions of the Note. The Company may prepay the outstanding balance of the Note with the Investor’s consent. At inception, the Note was redeemable into 881,143 shares based on the lowest volume weighted average price of $5.95817 on the inception date of November 19, 2021. As of September 30, 2023, the Note was redeemable into 14,627,372 shares of common stock based on 82% of the lowest volume weighted average price of $0.1399 on that date.

Total interest expense for the three months ended September 30, 2023 and 2022 was $52,859 and $61,508, respectively and $184,130 and $192,779 for the nine months ended September 30, 2023 and 2022, respectively.

On January 5, 2023 the Investor delivered its notice of redemption for $150,000 of the Note and related interest at the conversion price of $0.763, which was 85% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, China Pharma issued a total of 196,592 shares of common stock to the Investor on January 6, 2023.

On January 18, 2023 the Investor delivered its notice of redemption for $250,000 of the Note and related interest at the conversion price of $0.763, which was 85% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, China Pharma issued a total of 327,654 shares of common stock to the Investor on January 19, 2023.

On March 2, 2023 the Investor delivered its notice of redemption for $250,000 of the Note and related interest at the conversion price of $0.575, which was 85% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, China Pharma issued a total of 434,783 shares of common stock to the Investor on March 7, 2023.

NOTE 9 – LEASES

The Company has leases for certain office and production facilities in the PRC which are classified as operating leases. The leases contain payment terms for fixed amounts. Options to extend are recognized as part of the lease liabilities and recognized as right to use assets when management estimates to renew the lease. There are no residual value guarantees, no variable lease payments, and no restrictions or covenants imposed by leases. The discount rate used in measuring the lease liabilities and right of use assets was determined by reviewing the Company’s incremental borrowing rate at the initial measurement date. For the three months ended September 30, 2023 and 2022, operating lease cost was $19,413 and $19,101, respectively and cash paid for amounts included in the measurement of lease liabilities for operating cash flows from operating leases was $20,142 and $20,060, respectively. For the nine months ended September 30, 2023 and 2022, operating lease cost was $57,048 and $40,519, respectively and cash paid for amounts included in the measurement of lease liabilities for operating cash flows from operating leases was $59,667 and $42,554, respectively. As of September 30, 2023 and December 31, 2022, the Company reported operating lease right of use assets of $134,205 and $39,046, respectively and operating use liabilities of $134,794 and $40,445, respectively. As of September 30, 2023, its operating leases had a weighted average remaining lease term of 1.75 years and a weighted average discount rate of 3.55%.

Minimum lease payments for the Company’s operating lease liabilities were as follows for the twelve month periods ended September 30:

The Company has leases with terms less than one year for certain provincial sales offices that are not material.

NOTE 10 – INCOME TAXES

Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

Liabilities are established for uncertain tax positions expected to be taken in income tax returns when such positions are judged to meet the “more-likely-than-not” threshold based on the technical merits of the positions. Estimated interest and penalties related to uncertain tax positions are included as a component of other expenses. Through December 31, 2022, the Company has not identified any uncertain tax positions that it has taken. U.S. income tax returns for the years ended December 31, 2018 through December 31, 2022 and the Chinese income tax return for the year ended December 31, 2022 are open for possible examination.

NOTE 11 – FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, a hierarchy has been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; and Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

NOTE 12 – STOCKHOLDERS’ EQUITY

China Pharma is authorized to issue 500,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value. The preferred stock may be issued in series with such designations, preferences, stated values, rights, qualifications or limitations as determined solely by the Board of China Pharma.

According to relevant PRC laws, companies registered in the PRC, including China Pharma’s PRC subsidiary, Helpson, are required to allocate at least 10% of their after tax income, as determined under the accounting standards and regulations in the PRC, to statutory surplus reserve accounts until the reserve account balances reach 50% of the company’s registered capital prior to their remittance of funds out of the PRC. Allocations to these reserves and funds can only be used for specific purposes and are not transferrable to the parent company in the form of loans, advances or cash dividends. The amount designated for general and statutory capital reserves is $8,145,000 at September 30, 2023 and December 31, 2022.

Effective March 6, 2023 China Pharma implemented a 1-for-10 reverse split of its common stock. The reverse stock split was approved by the Company’s Board of Directors through unanimous written consent and China Pharma’s stockholders at its Annual Meeting for the fiscal year ended on December 31, 2021, which was held on December 27, 2022. Upon the effectiveness of the reverse stock split, every 10 shares of China Pharma’s issued and outstanding common stock were automatically converted into one share of issued and outstanding common stock. No fractional shares were issued as a result of the reverse stock split. Instead, any fractional shares that resulted from the split were rounded up to the next whole number. The reverse stock split affects all stockholders uniformly and does not alter any stockholder’s percentage interest in China Pharma’s outstanding common stock, except for adjustments that may result from the treatment of fractional shares. All share and per share amounts have been retroactively restated for all periods presented in the accompanying unaudited condensed consolidated financial statements.

2023 Share Issuances

On January 5, 2023 the Investor as discussed in Note 8 delivered its notice of redemption for $150,000 of the Note and related interest at the conversion price of $0.763, which was 85% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, China Pharma issued a total of 196,592 shares of common stock to the Investor on January 6, 2023.

On January 18, 2023 the Investor as discussed in Note 8 delivered its notice of redemption for $250,000 of the Note and related interest at the conversion price of $0.763, which was 85% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, China Pharma issued a total of 327,654 shares of common stock to the Investor on January 19, 2023.

On March 2, 2023 the Investor as discussed in Note 8 delivered its notice of redemption for $250,000 of the Note and related interest at the conversion price of $0.575, which was 85% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, China Pharma issued a total of 434,783 shares of common stock to the Investor on March 7, 2023.

On April 7, 2023 the Investor delivered its notice of redemption for $200,000 of the Note and related interest at the conversion price of $0.2808, which was 85% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, China Pharma issued a total of 712,250 shares of common stock to the Investor on April 13, 2023.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Current vulnerability due to certain concentrations

For the nine months ended September 30, 2023, no customer accounted for greater than 10.0% of sales and three customers accounted for 53.1%, 11.5% and 10.4% of accounts receivable. Two suppliers accounted for 13.4% and 10.4% of raw material purchases, and four different products accounted for 20.9%, 19.4%, 18.2% and 10.5% of revenue.

For the nine months ended September 30, 2022, one customer accounted for 10.2% of sales and three customers accounted for 52.8%, 11.4% and 10.4% of accounts receivable. Three suppliers accounted for 24.1%, 12.6% and 10.8% of raw material purchases, and four different products accounted for 25.5%, 25.0%, 14.9% and 11.2% of revenue.

Nature of Operations

Economic environment - Substantially all of the Company’s operations are conducted in the PRC, and therefore the Company is subject to special considerations and significant risks not typically associated with companies operating in the United States of America. These risks include, among others, the political, economic and legal environments and fluctuations in the foreign currency exchange rate. The Company’s results from operations may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The unfavorable changes in global macroeconomic factors may also adversely affect the Company’s operations.

In addition, all of the Company’s revenue is denominated in the PRC’s currency of Renminbi (RMB), which must be converted into other currencies before remittance out of the PRC. Both the conversion of RMB into foreign currencies and the remittance of foreign currencies abroad require approval of the PRC government.

NOTE 14 – SUBSEQUENT EVENTS

On October 6, 2023 the Investor discussed in Note 8 delivered its notice of redemption for $100,000 of the Note and related interest at the conversion price of $0.1092, which was 82% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, the Company issued a total of 915,750 shares of common stock to the Investor on October 9, 2023.

On October 12, 2023 the Investor discussed in Note 8 delivered its notice of redemption for $115,000 of the Note and related interest at the conversion price of $0.1026, which was 82% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, the Company issued a total of 1,120,857 shares of common stock to the Investor on October 17, 2023.

On October 17, 2023 the Investor discussed in Note 8 delivered its notice of redemption for $115,000 of the Note and related interest at the conversion price of $0.1026, which was 82% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, the Company issued a total of 1,120,857 shares of common stock to the Investor on October 17, 2023.

On November 6, 2023 the Investor discussed in Note 8 delivered its notice of redemption for $80,000 of the Note and related interest at the conversion price of $0.0753, which was 82% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion. Accordingly, the Company issued a total of 1,062,216 shares of common stock to the Investor on November 7, 2023.